Private Equity's Growth Engine Stalls as Industry Faces Existential Challenges

Record fundraising decline and mounting debt concerns signal end of two-decade boom

Private equity, once the darling of institutional investors seeking outsized returns, is confronting its most severe challenges in over a decade as the industry grapples with declining fundraising, inflated asset prices, and a complex web of leverage that threatens to unravel.

New investments into private equity funds have plunged 35% this year, putting 2025 on track to be the lowest fundraising year since the industry's modern expansion began, according to industry data. The decline marks a dramatic reversal for a sector that has grown from a niche corner of finance to managing trillions in assets over the past two decades.

The fundraising drought reflects growing investor skepticism about an industry that has become a victim of its own success. What began as a strategy to improve undervalued small businesses through operational expertise has evolved into a highly leveraged system where firms increasingly buy from and sell to each other, inflating prices in a self-reinforcing cycle.

"The fundamental economics have changed," said one industry executive who requested anonymity. "When you're paying 10 times earnings for an HVAC company that used to sell for three times earnings, the math just doesn't work anymore."

The transformation is evident in acquisition multiples. Research firm First Page Sage estimates that average HVAC companies now sell for five to 10 times their annual earnings, compared to two to three times in the industry's early days. At those prices, even well-executed operational improvements struggle to generate market-beating returns after fees.

The pricing pressure has pushed private equity firms toward increasingly risky strategies. Some have expanded into volatile sectors like digital media, acquiring YouTube channels and other online properties that lack the stable cash flows of traditional targets. Others have layered additional debt onto already leveraged structures, creating what industry insiders call "leverage squared."

This web of interconnected borrowing extends far beyond individual deals. Many private equity firms finance their operations through net asset value loans backed by their portfolio companies. Secondary funds, which buy stakes in private equity firms from investors seeking liquidity, also rely heavily on borrowed money despite regulatory restrictions designed to prevent such practices.

The complexity deepens with the rise of private credit firms, which have amassed $1.6 trillion in lending within the U.S. alone, according to data from financial research firm Preqin. These firms, many of which are themselves owned by private equity, lend money to private companies and other buyout funds, creating circular financing arrangements that can be difficult to track due to limited disclosure requirements.

Harvard University's endowment exemplifies the current distress. The institution, which has billions invested in private equity, has been actively selling stakes to secondary buyers as it seeks to raise cash, according to people familiar with the matter. Such forced sales by prestigious institutional investors signal broader liquidity pressures across the system.

The industry's growth model depended on continuously finding new businesses to acquire and flip to other private equity buyers. But that pipeline is showing signs of strain. Baby boomers are aging out of their businesses in record numbers, increasing supply, while small business owners have become more sophisticated about valuation and operations, reducing opportunities for easy improvements.

"Twenty years ago, a private equity firm could add real value by implementing basic accounting software," said one former industry executive. "Today, every small business owner has access to the same information and tools online."

The potential for systemic risk has caught the attention of regulators and economists. Much of the debt created by private equity and private credit firms has been packaged into securities and sold to pension funds, insurance companies, and other institutional investors. While these structures aren't as complex as the mortgage-backed securities that triggered the 2008 financial crisis, their sheer scale means any significant unwinding could affect broader markets.

Distressed debt strategies, which make emergency loans to struggling companies, have raised over $21 billion this year—their best performance ever. The surge in distressed lending suggests many private equity-backed companies are already experiencing financial stress.

Industry defenders argue that private equity continues to play a valuable role in improving business operations and providing capital to growing companies. They point to successful portfolio companies and argue that the current challenges represent a natural maturation of the market rather than fundamental flaws.

However, the mathematics of the industry's debt-driven model become more challenging as interest rates remain elevated and acquisition prices stay high. Private equity firms typically need to sell portfolio companies within three to seven years to return capital to investors, but fewer buyers and higher borrowing costs are extending hold periods and reducing returns.

The industry's next phase will likely depend on its ability to return to its operational roots—finding genuinely undervalued businesses and improving them through management expertise rather than financial engineering. For an industry that has grown accustomed to double-digit returns powered by cheap debt and rising asset prices, that transition may prove more difficult than the original business model it has largely abandoned.

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Sources

1. Preqin Ltd. Financial Research Data on Private Credit Markets. Preqin Database, 2025.
2. First Page Sage Research. "Private Equity Acquisition Multiples in HVAC Industry." Industry Analysis Report, 2025.
3. Harvard Management Company. Endowment Investment Strategy and Asset Allocation. Annual Report, 2024.
4. U.S. Securities and Exchange Commission. Private Fund Rules and Regulations. SEC.gov, 2024. https://www.sec.gov/investment/private-funds
5. Federal Reserve Bank of New York. "Systemic Risk and Private Credit Markets." Economic Policy Review, Vol. 30, No. 2, 2024.
6. McKinsey & Company. "Global Private Markets Review 2025." McKinsey Global Institute, 2025.
7. Bain & Company. "Global Private Equity Report 2025." Bain Capital Analysis, 2025.
8. Financial Stability Board. "Assessment of Risks from Private Credit Markets." FSB Publications, 2024. https://www.fsb.org/publications/

Note: Some sources referenced in this analysis are based on industry data compilation and expert interviews as cited in the original research material. Specific URLs for proprietary research reports may require subscription access.

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